You’ve heard the term. Everyone uses the term. But what, EXACTLY, is Crypto or Cryptocurrency… And how does it work? Let’s start with the basic definition. Cryptocurrency is digital currency, or digital money. But there’s no physical manifestation of money, like a coin or paper. It is real money, for sure, but it exists only online.
One advantage of a cryptocurrency is that you never have to convert one currency into another for it to work in another country. In other words, a cryptocurrency is the same in France as it is in Argentina. It passes freely from one person to another online… Between countries… And across borders. So, it’s quite versatile.
Cryptocurrency, as the ‘crypto’ part implies, is encrypted money. That means that you access it via user codes, not names on a bank account. It is also not stored in a central bank. In fact, all cryptocurrencies are decentralized, meaning that they are not managed on, or by, a central server.
Because of the way cryptocurrencies are built, they work consistently. They work the same way for everyone across the globe. But to fully understand cryptocurrency, let’s take a look at traditional money and how it works. Then, you’ll be able to grasp the concept of cryptocurrencies a bit easier.
Traditional Money
The money you have in your pockets… Or in the bank… is actually paper and metal. All by itself, it’s not really worth much. The value of the materials used to print a $10 bill, for example, is just a few pennies, if that. It’s worth $10, because our government says it’s worth $10. And in theory, there’s gold or some other commodity that ‘backs up’ the worth of the $10… or at least that was true in the past. Cash is no longer backed dollar for dollar by gold.
The Yen, the Pound, the Dollar are all ‘fiat money.’ Each government with its own currency, or fiat money, has created a system whereby people can trade their currency for goods and services.
But we don’t keep all of our currency in our pockets. We keep some of it in one or more bank accounts. That is to say we centralize our money in a bank or multiple banks, that are regulated by the government. We provide our personal information to a banker, who opens the account that holds our money. We can’t actually ‘see’ the physical money in the account, but we know it’s there. The bank keeps track of account numbers, ledgers. and balances… And displays them for us to see, so that we can keep track of our money.
In effect, we must have complete trust in our banks and our governments for our currency-driven society to function properly. The banks and governments are the third-party systems that ensure we have access to our money.
Crypto is somewhat like online banking.
Many of us have online banking capabilities. Those give us access to our money via a platform hosted by our bank, and we use a computer, tablet or mobile phone to access the platform. We can perform a multitude of transactions including: check balances, transfer money between accounts, send money to a third party, deposit physical checks, have our paychecks direct deposited, etc.
Cryptocurrency functions in a similar concept, but without a central bank. Like online banking platforms, it is software-based. The ‘ledger’ in crypto is called a blockchain. There are also account numbers, called “public addresses”… And balances that you can view, just like with an online banking platform.
There are no rules for using cryptocurrencies. Anyone can use them for any purpose. And, you don’t use your name for accounts, only codes. You can access your crypto balances using these codes and a password… (Called “private keys”). And you can perform transactions, just as you can with an online banking platform.
Blockchain
Blockchain is the latest revolution in technology. It replaces centralized databases owned by banks, travel companies, securities firms, stores, any type of company, really. As you know, centralized databases can be hacked. Many have been. I mean, who hasn’t had their bank notify you that a data breach has occurred at ‘x’ vendor (store) and that your credit card data has been compromised? Hacking has become a lucrative business. Afterall, hackers can hack a single database and gain access to tens of thousands, even tens of millions, of credit cards stored on a third party’s database. (The store’s or the bank’s database.) But what if you could transact business between yourself and whomever you’re purchasing from, with no third parties (banks, etc.) or databases involved? That is exactly what blockchain technology provides.
Because the Blockchain isn’t a centralized database, it can’t be hacked or compromised, at least not on the massive scale that a database can be hacked, obtaining data on millions of people with a single hack. Even if a bad actor actually manages to hack into a blockchain node (each of which is highly encrypted and extremely difficult to hack on its own), each node holds data for only one to a handful of people or transactions. Therefore, hacking a blockchain node is far less lucrative for the hacker than hacking a database. It’s built-in disincentive.
The blockchain is essentially a no-trust-required way to process and protect transactions. Meaning, no trust is required between you and your bank or any other third party. All transactions happen between buyer and seller only. This level of security and privacy is not possible with third parties and databases involved.
Bitcoin on the Blockchain
Since the introduction of Bitcoin, the first major player on the Blockchain, the security, efficiency, and versatility of the Blockchain has been proven out and the use of the Blockchain for multiple industries has begun to expand rapidly. As understanding of this technology becomes more mainstream, you can expect to see more and more businesses utilize the Blockchain to transact business. Along with the expansion of cryptocurrencies, you can expect to see more and more travel companies using blockchain technology in the very near future. Other businesses won’t be far behind, so understanding this new technology is critical. I know this is quite a bit to wrap your head around, but the Blockchain has changed our world in much the same way the Internet changed it decades ago. Everything just got more efficient and more secure. Everything from financial transactions to solving world hunger. Really!
You may not understand the impact of blockchain yet, but over the next 10 to 20 years, it will become common knowledge. And people will wonder how we ever lived without blockchain technology… much the same as teenagers today wonder how on earth we ever survived as a species without the internet. The sooner you wrap your head around blockchain technology, the better prepared you will be for the future.
Blockchain – a little more technical
To get a little more technical, Blockchain is actually a database protocol, not actually a database. That means it’s a set of rules that sorts data into ‘blocks.’ But for most people, it’s easier to think of a blockchain as a database. With that in mind, picture a spreadsheet where you store data in cells. Those cells are ‘blocks’. The blocks are linked in order by crypto codes, called “hashes”.
But unlike a database, these rules are distributed across multiple computers… Called Nodes… Rather than stored on a central server or managed by a single central entity, like a bank. Each node (computer) runs a copy of the software required to process cryptocurrency. A full node runs a full copy of the blockchain.
Algorithms control Crypto Transactions. These algorithms work the same way, every time, regardless from where they originate. Therefore, they don’t need a central bank or government to control the transactions. This decentralized technology has applications far beyond finance. Even people who are not fans of cryptocurrency support blockchain technology for other applications. As mentioned, a few travel companies now operate only on a blockchain, and many, many more will follow shortly… as will many other businesses. In short, any business that conducts transactions will be conducting those transactions via a blockchain in the not-too-distant future. So, try to learn as much about it as you can now, so that you’re prepared to take full advantage of all the opportunities that will be available to you over the next 10 years and into the future.
The Difference Between Cryptocurrency and Traditional Money
There are two key differences between Cryptocurrency and Traditional Money, a.k.a Fiat Money. The first is explained in detail above, but I’ll recap here. Traditional Money is centrally controlled by banks and governments. Cryptocurrency is not controlled by any centralized entity. The second difference is that Traditional Money is legal tender. That means it can be used to pay all debts, public (owed to the government) and private (owed to individuals). Cryptocurrency is not legal tender. Therefore, it cannot be used to pay public debts (debts owed to the government), such as taxes. At least not yet.
But cryptocurrency can be used to pay for anything else, provided the seller or service provider accepts cryptocurrency. As cryptocurrency becomes more and more popular, more and more individuals and business accept it.
Generally speaking, cryptocurrency is perfectly legal in the United States… And, in fact, most of the world. However, two things must be true regarding the use of cryptocurrency for it to be legal.
- You must pay taxes on the value of the cryptocurrency.
- Using cryptocurrency in any way that would be illegal to use traditional money is also illegal with cryptocurrency.
Cryptocurrency Transactions – What is Crypto?
Transactions using cryptocurrency are facilitated by software called a cryptocurrency wallet. This is a virtual wallet where you can view the balances associated with your public addresses (accounts). And you can authorize outgoing transactions… That is you can pay for goods or services… by using your private key (password).
You can store your cryptocurrency multiple ways. For long term storage, you should consider a “cold wallet”. A Cold Wallet is where you store your private keys (passwords) offline. There are a number of options for storing your cryptocurrency for short term use. One way is to keep funds on an exchange. An exchange is an online platform where you can exchange one cryptocurrency for another. But keep your transactions in exchanges brief. And once you’ve bought the cryptocurrency you want, move it into your own account (public address). In other words, Get in and get out. Because if you’re connected to the internet, your temporary storage of cryptocurrency is an easy target for theft.
A Quick Note on Mining Cryptocurrency
Mining Cryptocurrency is much like minting fiat money. Minting fiat money is the physical creation of coins and paper money, and mining is actually creating new crypto online. There are rules around who can mine crypto, how it can be mined, and how much can be mined. How much fiat money is worth is determined by the government. At one time, fiat money was backed by gold. And the worth of gold was determined by the market. But those days are long gone. In today’s world, we have no idea how much fiat money is actually in print, but we know it’s no longer backed dollar for dollar by gold.
Therefore, fiat money is worth whatever the government says it’s worth, and they alone decide how much can be minted, when and how. It is only our trust in our government that makes fiat money worth anything. On the other hand, like gold, the value of Cryptocurrency is controlled by the market. And it is the market, not the government, that dictates the amount of Cryptocurrency that can be mined.
For more info on Mining Crypto, read our article, here: ‘What is Crypto Mining? Can Anyone Do It?’
Cryptocurrency Security – What is Crypto?
The decentralized nature of cryptocurrency makes it more secure than most places where you can store money. There is no central server that can be hacked, giving the hacker access to many people’s accounts, as with a bank. Further, Bitcoin, for example, is secure because it uses multiple layers of one-way encryption that makes it nearly impossible to hack. The main risk of any cryptocurrency lies not within the software and technology used… But rather with the steps the user takes (or, more correctly stated, does not take) to secure his or her cryptocurrency.
You should put thought and effort into the secure storage of your private keys (passwords). If you forget/lose your private key, you lose access to the balances associated with it. Remember, there is no central bank where you can just walk in, show your ID and gain access to your money. If someone gains access to your crypto… If they find your public addresses (accounts) and private keys (passwords)… They can take/steal your cryptocurrency. And there’s generally no way for you to get it back. However, if you’re using an exchange… And exchange is hacked, rather than your personal account… Then you may be able to get your money back, as most exchanges will reimburse users if their exchange is hacked. Do your research, though! Choose reputable exchanges!
To minimize the user-related risks of cryptocurrency, be sure to do the following:
- Store your public addresses (accounts) and private keys (passwords) securely, offline.
- Don’t store all your crypto in a single location.
- Don’t store all your back-up public addresses and private keys in a single offline location, either.
- Choose strong and unique private keys (passwords). Consider using phrases or sentences that are easy for you to remember. And include both upper and lowercase letters… Additionally, mix in some symbols.
- Very Important: Use two-factor authentication on any account that allows two-factor authentication. If a platform does not allow two-factor authentication, consider an alternate platform.
- Be careful with URLs. Be sure you’re accessing the real URL, not a ‘faked’ one that looks similar to the real one. Phishing schemes are famous for using fake URLs to trick users into entering their personal data into the fake URL… Where hackers capture it and can use it to steal your money. Misspelled words are a big clue!
- Use a browser dedicated to crypto.
Cryptocurrency is a complicated topic for most of us. The above is a brief and simplified explanation. As you become more comfortable with crypto terms and processes, be sure to research any crypto you’re considering buying. And if you’re curious about mining crypto… What that is and how it works… read our article, ‘What is Crypto Mining? Can Anyone Do It?’
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More on Google
Also, Google has plenty of articles about Cryptocurrency, if you’re ready to learn more. Click here for a list of articles. And if you’re ready to earn Crypto, click here to learn how.
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